Pakistan Seeks More IMF Funding Amid Protests

Welcome to Foreign Policy’s South Asia Brief.

The highlights this week: An International Monetary Fund delegation arrives in Islamabad amid economic protests in Pakistani-administered Kashmir, U.S. Assistant Secretary of State for South Asia Donald Lu travels through the region, and India inks a port management deal with Iran.

IMF Officials Visit Pakistan

Economic stress triggered violent protests in Pakistani-administered Kashmir this week. The unrest couldn’t have come at a worse time for Pakistan’s government. A senior delegation from the International Monetary Fund (IMF) arrived in Islamabad this week to discuss the possibility of a new, badly needed assistance package.

The IMF visit comes days after the fund released a report signaling concerns about Pakistan’s capacity to implement austerity policies and economic reforms. Some of these policies—including electricity hikes and withdrawn subsidies—are exactly what the protesters in Kashmir were rallying against.

Pakistan, which nearly defaulted last year, has achieved a measure of economic stability in recent months. An IMF package last year brought in much-needed revenue. Inflation has been cut in half, from 38 percent in May 2023 to a little more than 17 percent last month. Import control measures have eased the external account deficit, and interest from foreign investors has increased.

Still, the economy remains in crisis, saddled by serious debt and only expected to grow by 2 percent during the current fiscal year, which ends on June 30. And it’s hitting the public hard, as shown not only by the protests in Kashmir, but also by farmers demonstrating against Islamabad’s bizarre decision to import wheat despite bumper harvests, which they say will result in a drop in prices—and thus profits.

Looming over all of this is the question of essential but elusive economic reforms. Pakistan’s economy has suffered from serious structural constraints for decades: a large but inefficient agricultural sector, an overdependence on a sole export—textiles—that struggles to compete globally, heavy reliance on expensive hydrocarbon imports, insufficient tax revenue, and severely indebted public enterprises.

This means that Pakistan’s economy is vulnerable even in the best of times, and it takes devastating hits from external shocks—as was the case over the past few years after supply chain bottlenecks caused by the COVID-19 pandemic and Russia’s war in Ukraine.

Without reforms to addresses structural weaknesses, Pakistan’s usual tactics during economic crises—especially the pursuit of bailouts and other assistance—will only bring temporary relief before the next catastrophe hits. Today, the government’s strategy includes a new investment mechanism intended to attract capital from the Arab Gulf states and beyond, heavily influenced by Pakistan’s powerful army chief.

However, Islamabad insists that it’s committed to reform. The military backs the current government completely and likely had a major hand in starting the privatization process for Pakistan’s cash-strapped national airline earlier this year, a key reform agenda point. Past Pakistani governments have reneged on reform plans for political reasons given the powerful interests that resist them, from agricultural lobbies to entrenched bureaucracies.

Pakistan’s finance minister, Muhammad Aurangzeb, offers some hope. He is a banker rather than a politician, suggesting that he won’t be as vulnerable to these political pressures. But the government already appears to be undermining Aurengzeb, depriving him of key portfolios and giving more power to Ishaq Dar—a former finance minister and the current foreign minister.

Facing public anger as well as rejection from Pakistanis who say the country’s February election was rigged, the government may conclude that it lacks the political capital to pursue reforms. The military, which has vast holdings across many sectors, may eventually change tack if it fears that the changes would imperil its own economic interests. If Islamabad once again fails to undertake reforms, it would be more than just another missed opportunity.

This time around, the stakes are especially high. Pakistan is experiencing a worsening brain drain problem, with rising numbers of people leaving to work abroad, undermining a key potential economic asset—its large population. It also faces a surging terrorism threat that periodically targets foreign investments in the country. Further down the road, worsening climate change effects could wreak havoc on the economy, including the vulnerable agriculture sector.

Pakistan could reach a point where the costs of letting political expediency prevail over prudent economic policy become prohibitively high—for the economy, and for the country on the whole.

What We’re Following

Donald Lu visits the region. Donald Lu, the U.S. assistant secretary of state for South and Central Asian affairs, visited India, Sri Lanka, and Bangladesh this week. A State Department press release ahead of the trip described it as an effort to strengthen bilateral ties and show U.S. support “for a free, open, and prosperous Indo-Pacific region.”

This wording suggests a U.S. desire to showcase its strategic approach to South Asia. Although the State Department statement mentioned rights and democracy in reference to Sri Lanka, values were not a prominent theme in the public messaging around Lu’s trip. This is significant in Bangladesh, where the United States emphasized election integrity in the lead-up to the country’s January vote. The State Department later categorized the polls as not free or fair.

The Biden administration appears keen to underscore the wide range of priorities attached to the U.S. Indo-Pacific strategy, which include rights promotion as well as commercial ties and climate change cooperation.

U.S. counterterrorism cooperation with Pakistan. On Monday, the United States and Pakistan issued a joint statement at the conclusion of a bilateral dialogue that focused in part on shared concerns over the Islamic State-Khorasan (IS-K) and the Tehreek-e-Taliban Pakistan. The meeting was significant, given that the Biden administration has sought to reframe relations with Pakistan to focus more on nonsecurity issues since the U.S. withdrawal from Afghanistan.

The United States is likely motivated by its growing concerns about IS-K, which in recent months has demonstrated an increasing capacity to project a threat well beyond Afghanistan, including in Europe. U.S. officials want to explore new counterterrorism collaborations with Pakistan, which borders Afghanistan, IS-K’s main base.

Still, the possibilities are somewhat limited given that U.S. security aid to Pakistan has been suspended since 2018. Notably, the joint statement mainly spoke of cooperation beyond funding and weapons, including capacity-building initiatives such as police training as well as assistance with investigations and prosecutions.

India inks Iran port management deal. On Monday, New Delhi announced a deal to develop and operate a port in Chabahar, Iran, for 10 years. The accord follows a similar agreement reached in 2016, although progress has been limited. The port project is strategically significant for India, enabling it to use an alternate route that avoids Pakistan to access Central Asia—a gas-rich region with which Islamabad is also trying to strengthen commercial engagement.

In 2018, the United States said the Chabahar port was exempt from sanctions. But with U.S.-Iran relations becoming downright hostile in recent months, such a waiver—while still likely for a key U.S. partner—may not be automatic. Asked about the deal on Tuesday, a State Department spokesperson did not exactly provide reassurance, saying that “any entity” doing business with Iran runs the risk of sanctions.

However, India’s deal could help advance U.S. interests. It pushes back against China, which has strengthened ties with Iran in recent years. It also facilitates the transit of goods, including humanitarian support, to Afghanistan. India, which previously stopped importing Iranian oil in deference to U.S. sanctions, will hope that such considerations can protect it this time around.

Under the Radar

India’s relations with the Maldives are still in a difficult phase. The Maldives has called for an end to India’s military presence in the country while strengthening ties with China, including military cooperation. Yet the island nation continues to make requests of India, which New Delhi grants.

In April, the Maldives requested that India allow some limited exports of essential goods to the country, and it complied. This week, after a visit to New Delhi, Maldives Foreign Minister Moosa Zameer announced that India had agreed to extend $50 million in budget support to the country for another year. India’s state bank provides these bills to the Maldives at no cost and free of interest.

These requests for support point to the Maldives’ continued desire for close ties with India. Maldivian President Mohamed Muizzu seems to genuinely seek better balance in his country’s relationships with India and China. Meanwhile, New Delhi’s willingness to provide continued support to Male underscores its own view that the bilateral relationship remains important—and that India is keen to remind the Maldives of that fact.

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Regional Voices

Activists Nipun Malhotra and Sanskriti Bhatia argue in the Print that it’s time to rethink how disability rights are framed in India. “This is our moment of reckoning, to reimagine India’s disability-policy landscape, turning the tide from oversight to inclusion,” they write.

A Kathmandu Post editorial professes skepticism after a pledge from multiple Nepalese political parties to attract more investment to Nepal. “The only way Nepal will attract quality investment and make a leap in its development endeavour is through a collective political effort to ensure policy consistency,” it argues.

In the Daily Star, journalist Tamanna Khan argues that Bangladesh can and should do a better job of fighting dengue fever. “Each and every life lost from dengue is preventable, at least it should be in the 21st century,” she writes. “Besides, Bangladesh has succeeded in eradicating several diseases in the past. Why not dengue?”